 Printer-friendly version
(Please check against delivery)
Thank you, Shannon, for inviting me to be here and thank you, to those of you in the room and listening to the webcast, for the opportunity to be with you today.
Before I begin I would like to draw your attention to the caution regarding forward-looking statements.
In addition, BMO is currently in its quiet period until we report our Q1 earnings on March 4, 2008. At that point we will provide an update on our financial results and performance against financial targets.
And, since we report in Canadian dollars, I will use Canadian dollars for this discussion, unless otherwise noted.
Today, I’d like to talk to you about BMO Financial Group … our businesses, some of the opportunities we see for continued growth and improved financial performance with a particular focus on our U.S. Personal & Commercial business.
Founded in 1817 as Bank of Montreal, BMO is a diversified North American financial services provider. With almost 36,000 employees, we have a strong presence in Canada and the United States.
At BMO’s October 31, 2007, fiscal year end, we had total assets of $367 billion.
Our common shares trade on both the New York and Toronto stock exchanges and we have a market capitalization of approximately $28 billion as of December 31, 2007.
In general, we serve a broad range of personal, corporate, and institutional customers through four operating groups: Personal and Commercial Banking Canada; Personal and Commercial Banking U.S. – the business I lead; the Private Client Group and BMO Capital Markets.
For Fiscal 2007, BMO reported Net Income of $2.1 billion. This performance demonstrated the strength of our core businesses and our diversified business mix in a very challenging environment.
We dealt with four significant items in 2007 – both internal and external. These resulted in $787 million in after-tax charges, which are included in these results.
These items including charges related to the deterioration in the capital markets environment, commodities losses, restructuring charges and an increase in the general allowance for credit losses – weighed heavily on our results in 2007.
Excluding these charges, net income was $2.9 billion, a 16.3 per cent compound growth rate over the last five years.
We earned a return on equity of 14.4 per cent in Fiscal 2007 which includes these significant items. This is a true testament to the diversified earnings power of the business, both by geography and by source of earnings.
Further, the annual results – excluding these items – reflect an ROE of 19.8 per cent. This highlights the resiliency of our businesses and the strong fundamentals of our core operations.
We continued to deliver consistent returns, with reported return on equity above 13 per cent for the 18th consecutive year, the only bank in our North American peer group to achieve this, and we continue to deliver value to shareholders through our commitment to a high dividend payout ratio of 45 to 55 per cent.
In Fiscal 2007 BMO increased its dividend, to $2.71 per share, from $2.26 per share in Fiscal 2006. Over the past five years, the dividend has increased at a 17.7 per cent compound annual growth rate.
I’d like to give you a brief overview of BMO’s Fiscal 2007 results by group.
Personal and Commercial Banking Canada – which we call P&C Canada is our full-service Canadian retail banking business.
P&C Canada delivers its products and services through a distribution network comprising almost 1,000 branches, almost 2,000 ATMs, as well as Internet and telephone banking channels.
In all, P&C Canada serves more than seven million customers.
P&C Canada is our largest business. Last year this group generated a record $1.25 billion in Net Income, up 9 per cent year over year and accounted for 57 per cent of total operating net income.
This business is fundamentally stronger and better positioned - than it was just over a year and a half ago.
Underpinning our positioning and our growth plan is a renewed commitment to customers. In 2007 we backed this commitment by adding 21 new branches and redeveloping 31 more – the most we’ve ever completed in a year.
P&C Canada also added more than 900 full-time employees in Fiscal 2007, more than 90 per cent of them in client-facing roles. Twenty-five per cent of the new hires are specialized employees, including commercial account managers, financial planners and mortgage specialists.
I will review the financial performance of P&C US, the business that I am specifically accountable for, separately, in a few moments.
The Private Client Group brings together BMO’s wealth management businesses serving a full range of client segments, from mainstream to ultra-high net worth, as well as select institutional market segments across Canada and in key wealth markets in the U.S.
This group also had a record year, with net income of $408 million, up 15 per cent from a year ago. This amounted to 19 per cent of BMO’s Fiscal 2007 total operating net income.
BMO Capital Markets is an integrated corporate and investment bank. We are a bulge-bracket firm in Canada, with a diverse group of clients. In the U.S., our focus is on mid-market clients in selected industries.
In Fiscal 2007, net income for this group was $425 million – representing 19 per cent of the Bank’s total operating net income – down significantly from the prior year as a result of commodities losses and the charges related to the deterioration in the capital markets environment. Excluding these items, net income rose to nearly $1.1 billion, an increase of 25 per cent.
Looking, briefly, at the whole bank, Fiscal 2007 was also characterized by a $159 million pre-tax charge. This was for our restructuring program, reflecting an initiative to enhance customer service by directing spending and resources on front-line sales and service improvements and on creating more efficient processes and systems.
The program is on-track and has been a success, eliminating more than 800 jobs, to date.
Before discussing P&C U.S., let me also take a moment to speak about BMO’s position in the Structured Investment Vehicle market – known as S-I-Vs. BMO is the sponsor and manager of two S-I-Vs, Links and Parkland. We’ve been in the S-I-V business since 1998 and historically it’s been very successful.
We have a high quality team with an excellent reputation. Most importantly, more than 95 per cent of the capital notes are held by third party investors.
The asset quality in those portfolios is extremely high, with 95 percent of the portfolio rated AA or better as of January 11, 2008.
Over the last several months, we have been reducing the size of these S-I-Vs. For example: Links was about $23 billion at the end of July and as of January 11 was just over $15 billion.
To continue to make progress we have to focus on three things: reducing the size of the S-I-Vs, maintaining the quality of the assets, and maintaining good communication with the capital note holders, whose interests are aligned with ours. If we do these things, we expect each quarter will show progress.
Now let me turn to our U.S. personal and commercial banking business. We are a small contributor to BMO’s results, but an important part of the U.S. growth strategy.
BMO was well established in the U.S., but made its first major expansion here in 1984 with the acquisition of 100 per cent of Chicago-based Harris Bank, with 15 branches, for US $547 million.
BMO was the first Canadian bank to acquire a major U.S. financial institution.
That acquisition reflected a deliberate strategy to expand in the U.S. marketplace through a very capable regional competitor with a recognized and respected brand identity, established strengths in both the personal and commercial sides of the business and a track record of more than 100 years.
As importantly, in Chicago we focused on a marketplace where the top three banks controlled a comparatively smaller share of deposits and where we could find opportunities to grow. In fact, even today the top six banks hold less than 50 percent of the deposits in Chicago compared with over 60 percent in most other large MSAs. And the Chicago MSA continues to show solid growth in both population and median household incomes.
Chicago is the hub of the Midwest region, which has a total population base of about 66 million people double that of Canada’s population – and regional GDP of almost $2.7 trillion U.S. – also about double that of Canada.
This is a highly diversified economy and the banking industry is still fragmented so there are great opportunities for our growth plans.
We continue to focus on the Chicago area as the center point of our U.S. business and we have expanded selectively, looking for communities where we can leverage the Harris brand and move into attractive regional markets.
Including our two pending Wisconsin acquisitions, BMO has invested almost $2 billion U.S. in 14 additional acquisitions since 1984. These have expanded our branch network’s geographic footprint and enhanced our core competencies.
We offer a full range of products and services to more than 1 million customers and we do this through a community banking model that emphasizes local knowledge and commitment.
Our distribution system now encompasses more than 230 Harris branches, 600 ATMs, online banking at www.harrisbank.com, and an award-winning call center.
On the basis of deposits for consumer and small business customers, we hold the number two position in the 10 counties where we operate in the Chicago MSA, with a market share of almost 8 per cent.
Harris Bank is an ideal platform on which to build a larger and more profitable business. Harris has a unique business model, in that we share the same customer focus as smaller community banks but have the breadth of services of the larger network banks.
Our expansion is continuing with the pending acquisitions of Ozaukee Bank and Merchants and Manufacturers Bancorporation in Wisconsin. They will add another 41 full-service branches to our growing network.
On closing, we will have more than 270 locations with a third of our branches outside Illinois, compared with none just over three years ago.
In the United States, the operating environment in Chicago in Fiscal 2007 was characterized by intense competition, soft housing markets, a weak auto industry and slowing economic growth.
Net interest margins in Fiscal 2007 were compressed significantly over the previous year. Although P&C U.S. continued to achieve good volume growth in 2007 the compression of net interest margins slowed overall revenue growth.
We responded by focusing resources on high-return businesses, adjusting our workforce to reflect customers’ changing demands, as well as closely managing expenses and we did see some stabilization of margins in the second half of the fiscal year.
In Fiscal 2007 – and excluding the integration costs of our acquisitions – P&C U.S. recorded four consecutive quarters of net income growth.
The fourth quarter was particularly strong, with a 51 per cent increase in net income year-over-year and a cash efficiency ratio of 69.7 per cent, excluding integration costs. This efficiency ratio number may be higher than what you typically see with U.S. regional banks. At Harris, we do not have the treasury activities or mid-market business in our results that others do.
Looking at Fiscal 2007, we generated net income of US $105 million, representing 5 per cent of total bank net operating income.
And looking at Fiscal 2008, margins will likely remain under pressure, due to both increased wholesale funding costs and competition.
Our strategic priority for this business remains the same – to become the leading personal and commercial bank in the U.S. Midwest. As we have noted previously at this conference and at other venues, our objective is to have a network of 350 to 400 branches.
Obviously, real estate lending continues to be at the forefront of the news, so let me address that business. We do not originate sub-prime mortgage programs and as a result, we have very little retail exposure with sub-prime characteristics. In fact, we see the turmoil in real estate markets as an opportunity for Harris. Our credit history – like that of BMO – is one of relative success and consistency throughout the business cycle.
With the number of mortgage lenders shrinking, we expect to increase our market share. In fact, our mortgage business is seeing an increase in applications of more 10 per cent year over year while the market volumes are down by more than 30 per cent in the same period.
I will use most of my remaining time to discuss the strategic agenda we are pursuing at Harris.
First, we will continue to differentiate ourselves by focusing on our customers. We are making customers our obsession. We know the experience customers have with us will differentiate our company and we are doing all we can to bring our customer promise – “We’re Here to Help” – to life in every interaction and transaction.
We are making sure our people have the tools they need to provide exceptional service consistently, simplify financial matters for our customers, and provide meaningful choices and proactive guidance.
By using the Net Promoter Score – first introduced at Harris, and now being used in all of P&C Canada – we have an accurate measure of how we are doing in our customers’ minds. The Net Promoter Score tells you the percent of your customers who are active advocates for your business. It takes the number of customers who would recommend your service and subtracts the detractors. The result is your Net Promoter Score. In our view, it’s the best measure of loyalty there is.
At Harris, our NPS is 41 percent. That far outpaces the NPS of the network banks and we are closing in on the customer-focused community banks.
To best serve our customers, we continue to review all of our channels – branches, ATMs, online or phone, and emerging other alternatives – to determine how we can consistently improve our service and anticipate customers’ future needs and desires.
Second, we will improve sales force productivity across all our lines of business and improve collaboration among our teams in personal, business and wealth to broaden and deepen our relationships with ALL customers.
As I am sure you will also recognize, this strategy dovetails with a planned significant increase in our US wealth businesses. Given the demographics of our current retail customer base, the overall market potential and the power of our wealth offering, this is an area in which we will perform better.
Here are some of the specific initiatives we will roll out throughout Fiscal 2008 to grow our wealth segment:
- Licensed personal bankers – We will train personal bankers in select markets to offer a defined range of investment products;
- Mass affluent offering – We will develop a more thoughtful approach to clients with $100,000 to $1 million in assets to invest. This target client group is an important and growing market segment; and
- Integrated wealth branches – Here, we have identified a number of established Chicago-area branches with a significant proportion of high net worth clients. Partnering with members of our wealth team, we’ll refine how we interact with these customers to make sure we’re capitalizing on these opportunities.
Our third strategy is to expand our commercial banking sales force in Chicago and surrounding areas.
This strategy encompasses several complementary threads.
First, we will increase the contribution Business Banking makes to our overall revenue mix. We’re looking at all of our segments: Micro, Small, Commercial Mid Market and Commercial Real Estate, for ways to better serve our customers and grow our business.
At the same time, we will improve the execution, accountability and returns. We are strengthening our offering through new capabilities in areas such as cash management and through an end to end process review to improve our turnaround time and effectiveness in serving our customers.
We’ll also look to capitalize on the disruption in our market including B of A’s purchase of LaSalle Bank, a long-time Chicago institution that specialized in serving the mid-market segment. We’ve already taken advantage of this by hiring top talent strengthening our ability to attract new and serve middle market business customers.
We will leverage our strong retail presence in new markets. We have a lot of opportunity to introduce our strengths in meeting commercial clients’ needs for a broader range of products and services. In fact, in central Indiana, we created a new small business team that is already bringing new customers in the door.
We also expect to be able to take advantage of cross-selling opportunities with both our Private Client Group and BMO Capital Markets.
Our fourth strategy will be to continue the geographic expansion that has seen Harris add 64 branches and expand our deposit base from US$14.1 billion to $17.2 billion over the past three years.
In 2005, we consolidated more than 26 individual bank charters, and, in 2006, we moved all the branches onto a new technology platform. This investment has enabled us to integrate new acquisitions more effectively. As a result, our business is scalable. And with the capabilities we have in place, we can add more branches and more business without a comparable increase in our cost structure. This is why you’ve seen us slow down our new branch openings and focus on acquisition where we immediately gain customers, deposit bases and market presence. These transactions are accretive after about a year compared with three to five years for a new branch.
We expect further improvements through our end to end process review. The outcomes will enhance customer service through reduced turnaround times and will ultimately reduce our costs.
Going forward, we will continue to emphasize the same criteria in prospective acquisitions:
o Strategic fit with our community banking model
o Cultural fit in terms of risk appetite and customer focus
o Financial fit where we can expect to enhance profitability
Harris continues to be the “acquirer of choice,” for banks who may be looking for a larger partner to enable their growth strategies, or to effect a business transition for succession planning, or who want to exit the business, given the current economic environment.
In addition to enhancing our competitive position, these strategies also will improve our financial performance. We will continue to actively focus on performance measurement and management across the business.
Like our colleagues in Canada, we now have business unit, branch and individual targets on cross-sell referrals, customer needs assessments, calls and revenues and we have tools for leaders to ensure team members meet their goals.
Over the past year, I have spent two days a month in the field - at our branches or the call center. I have been really impressed with the way our teams are putting our customer-first focus into action – and delivering results.
During a recent visit to our call center, I listened in to a great call. A vendor called us seeking our business. He is a provider to financial services companies and thought we would be a good prospect.
The call went to one of our team members who listened carefully and engaged the caller in conversation. She asked: Where did he bank? Was he satisfied with his relationship? Would he be interested in hearing more about what we have to offer? It turns out, he was interested and met with our Business Bankers. The end result? We secured all of his banking business including deposit accounts and cash management services. And he ended up with some work from us, too.
To me, this is a great example of our team members thinking creatively, going after every opportunity, focusing on what WE can do for our customers. And I have many more similar stories, which is why I’m so excited about our future.
Like all companies, we are facing challenges to our continued growth and we need to find ways to close gaps, seize opportunities and re-invent our business to be responsive and relevant to our customers.
We accomplished a number of things in 2007 that are foundational to support improved financial performance.
Our emphasis in 2008 is to produce results that impact the bottom line.
These U.S. strategies also underpin the priorities and strategies for BMO as a whole. In particular, we will leverage BMO’s strengths in wealth and business banking to drive growth in P&C U.S.
More specifically for P&C U.S., our focus is on improving our net income, net of integration costs.
Acquisition integration costs will occur again in 2008 as we integrate two further acquisitions. However, we see real business opportunities in the current environment to improve core business performance.
Let me move back to a total bank perspective. The financial results achieved by BMO in Fiscal 2007 reflected our core strengths and the diversity of our operations.
At the same time, however, the challenging conditions which led to these mixed results have not yet fully resolved themselves.
Our targets for 2008 have therefore been set in the context of our performance in 2007 and our expectations for the economy in the year ahead. The targets reflect confidence in our underlying businesses and their teams, the increased focus we are placing on the customer and our commitment to generate strong returns for our shareholders.
We are targeting 10 to 15 per cent EPS growth from a base of $5.24 per share, with an ROE of 18 to 20 per cent. We’re targeting revenue growth two percentage points above expense growth, and expect to maintain a Tier 1 Capital Ratio of at least 8.0 per cent.
As we noted on our Q4 conference call in November we expect the recent unsettled conditions in financial markets to resolve themselves in the second half of 2008 and that we will then see a return to more stable conditions and markets.
The US economy has slowed and in the Midwest we are actually in about the third year of much slower growth. However, what we’ve seen in Chicago is that housing prices are declining at about half the national average.
While Canada’s economy is well positioned to withstand a U.S. slowdown a recession in its largest trading partner, coupled with the still-high currency, would lead to a pronounced period of weakness in Canada.
This could challenge the current vibrant Canadian housing market, leading to an increase in mortgage defaults.
In short, we have begun 2008 with significant positive momentum in our business, recognized opportunities for improved financial performance and profitable growth and clear, well developed strategies to achieve our objectives – both for 2008 and for the longer term.
Thank you for your attention. I will now be pleased to respond to your questions.
|
